Workers who sign up to Britain’s pensions revolution could be the victims of ‘a mis-selling scandal on an unprecedented scale’, because employers push them into old schemes with sky-high charges, a damning report warns today.

On October 1, new rules came into force meaning that, for the first time in history, all bosses must pay into a pension scheme for workers aged from 22 to state pension age who earn at least £8,105.

Up to 11million workers will be automatically signed up over the next five years, a process known as ‘auto-enrolment’. Under the new rules, workers between the age of 22 and State pension age who earn at least £8,105 will be automatically enrolled.

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Contributions will begin low but will rise to four per cent from workers, three per cent from their boss and one per cent from tax relief in October 2018, making a total of eight per cent.

The process starts with large companies, while smaller employers have been given longer to meet the new requirements.

Today’s report by the Pensions Institute, part of Cass Business School, says bosses of smaller firms could enrol their staff into pension schemes set up decades ago, when charges were far higher, at up to 4 per cent, potentially halving the value of pensions.

ARE YOU SAVING ENOUGH FOR RETIREMENT?

It says the new rules, which represent the biggest shake-up in pensions for more than a century, will be ‘a failure’ if charges of up to four per cent are not cut to a reasonable level.

A worker in a scheme with low charges of just 0.3 per cent for 40 years will enjoy a pension which is 100 per cent more lucrative than a person in a pension with high charges, it says.

Take the example of a worker who retires with a pension of £10,000 a year after paying a charge of 0.3 per cent.

Their friend who paid in the same amount of money would get only a pension of £5,000 a year if their scheme charged a fee of three per cent, it says.

Dr Debbie Harrison, co-author of the report, said: ‘Unless older high-charging schemes are abolished, their use for auto-enrolment will lead to the UK pensions market facing a mis-selling scandal on an unprecedented scale.’

The problem exists because many small and medium-sized companies have historically only provided pensions schemes for higher earning staff. Many firms purchased 'group personal pensions' in the 1990s that included higher charges, but which seemed viable at the time thanks to better stock markets returns and higher contributions of scheme members.

While members of these schemes might now be suffering high-charges, they are unlikely to be victims of mis-selling because they effectively chose to take part in the schemes. Worker that are now to be auto-enrolled into the schemes have no such choice, and are therefore at risk of mis-selling.

Dr Harrison said that a question now remained about who should bear responsibility for telling workers and small employers that schemes may not be fit for purpose. She said: 'It really ought to be employers that ensure their workers are in an appropriate scheme but this may not be realistic because companies themselves could be unaware of the charges their scheme is making. There is an advice gap.'

Last night, Steve Webb, the Pensions Minister, said he is keeping an eye on pension charges ‘like a hawk’ and will impose a strict limit if charges do not come down voluntarily.

Auto-enrolment has triggered the launch of many new pension providers, such as Nest and The People’s Pension, which have charges as low as 0.5 per cent a year. They have been launched specifically to meet the demand created by auto-enrolment.

Watching like a hawk: Pensions minister Steve Webb said he is concerned over pensions charges and that he will not shy away from applying a cap

But many workers will not be signed up to these schemes by their bosses, but put instead into old pension schemes with charges which are six times higher.

He said: ‘I am watching pension charges like a hawk. The creation of Nest has prompted new low-cost offers in the market, which is encouraging.

‘But I am concerned about charges in legacy schemes and have challenged the industry to bring these into line with new business.

‘I have the power to cap charges and will do so to protect consumers if I need to.’

Tom McPhail, head of pensions research at Hargreaves Lansdown, said there was a danger of overstating the problem of expensive group pension schemes.

'The (Pensions Institute) report makes some rather hyped up claims regarding pension charges and seems to ignore the recent DWP research which shows that average pension charges for workplace pensions are now below 1 per cent.

'We are concerned that the Pensions Institute so readily dismisses investment performance and good member engagement as factors affecting pension payouts, it also fails to address the importance of employers providing their employees with an effective shopping around process at the point of retirement.'

The first wave of companies that must meet the new requirements include the large retailers, which employ high numbers of low paid workers that have not saved into a pension up to now. These businesses, such as M&S and Tesco, have worked to adapt their existing schemes or build two-tier schemes so that low-paid workers can save according to the terms of auto-enrolment.

Joanne Segars, chief executive of the National Association of Pension Funds, said: ‘Every pound saved has to count.

‘It is very damaging to automatically put people into pensions with high charges.

‘They will either see their savings eaten away or they will choose to quit their new pension, defeating the whole point of this much-needed reform.’

Morten Nilsson, chief executive of Now: Pensions, a new provider which sponsored the institute’s report, said: ‘There still exist many pension schemes which, while compliant with the new auto-enrolment regulations, are not truly fit for purpose today.

‘They have high charges and the investments are too volatile. In short, they stand too little chance of delivering a satisfactory pension.’